I liked your explanation of your game plan, June 22, The Daily. But I am still confused about short selling. Apparently Thom Calandra and several others feel short selling to be risky, dangerous, expensive, requiring constant monitoring, and suitable only for professionals. Calandra thinks options are even worse. I can't figure out why. I stayed away from short selling for a long time because of these warnings. Since I started doing short sales a month ago I feel as though I'm in a bull market again, only in reverse. I'm making money with what feels like a lot more safety. Am I missing something? (June 25, 2002)
You are discovering something we have been trying to instill ever since we started publishing these newsletters several years back: you can make money regardless of which way the market goes. All you have to do is look at what the prevailing strong trend is and then play that trend. It can be up or it can be down. There can be an overall trend and then subtrends within it. Example from today: overall downtrend in the large caps but overall uptrend in small and mid-caps. Play the trend that is easiest for you; play the trend that you understand and are comfortable with.
What many have against short selling is the risk associated with it. The idea is that if a stock does not fall but keeps rising, your risk is potentially unlimited. It is similar to selling naked calls: if you sell a $40 call on a $35 stock but that stock just keeps going up and up and hitting $70 you could be called out at $40 and have to go out and buy the stock at $70 to sell it at $40. Ouch. Shorting is the same thing: if the stock rises you have to repay the stock you borrowed and sold with stock at market price. Thus your risk is unlimited.
Add on to that the fact that downside action can be rapid and volatile, as well as the general idea that the individual investor is incapable of rational decision-making in the wake of the tech meltdown, and you have a lot of advisors saying do not short and do not buy puts.
As you have discovered, however, the money to the downside in this continuing downtrend and bear market is AS EASY as it was to the upside in 1998 and 1999. Just as investors could buy each dip in the raging bull market, short sellers or put buyers can 'buy' into each rally to the resistance levels and then reap the easy gains as stocks fall once again. The trend is so slanted downside right now it is truly easy. Received another email Tuesday from an investor who plays whatever side the market that presents itself. He was up 57% for the year. We have corresponded with other subscribers who are up even more.
The brokers and advisors are against short selling because they are afraid the masses will get burned in a market reversal. These are the same guys who were against selling puts into the massive bull run. It was a no brainer; it was hard to lose, but in theory your risk was huge: if the stock went to zero, you had to make up the difference. You are not like that however. You are an educated investor and take what the market gives you. You will not get caught up in the euphoria. You will take your gains when they are there and you will cut your losses when the plays move against the trend. Staying with the trend, however, gives you a great buffer or cushion. If the trend is broken, exit. If not, let it work for you. We teach this over and over in the online seminars (live, CD series, archive series, whatever) and it is amazing and great when you see the light come on inside the heads.
One thing we prefer. We like to buy puts because our risk is limited to the amount invested, no more. Sometimes it is a challenge to find a good delta at a good price for the anticipated move, but we can usually do it. If not we will pass on the trade. We do short stocks, e.g., when we see just the best shorting pattern out there and there is no option chain. In that case we have been known to do some shorting.
In sum, you are not missing anything. Indeed, you have recognized the overall trend and you are taking advantage of it. That is the key to success: unemotional pursuit of the best trends in the market. You cut away the baggage that is not going to make you any money (i.e., long on tech stocks) and put that money to work for you in areas that will make you money the fastest and safest. Playing the downtrend is the way to do it.
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